OTTAWA - The Conservative government's first budget must deliver on much-promised corporate tax cuts because Canada's credibility in both domestic and international capital markets is on the line, the country's leading chief executives say.
"An aggressive approach to corporate tax rates is especially important for Canada as we compete for investments in operations designed to serve customers across North America," the Canadian Council of Chief Executives said in an open letter, made public yesterday, to Finance Minister Jim Flaherty.
The CEOs also warned of the need to cap government spending, which has outpaced both inflation and economic growth in recent years. They recommend that federal departments identify savings each year equivalent to 5% of their operating budgets, much as households regularly do to deal with unexpected costs.
The letter to Mr. Flaherty was released a week before the Finance Minister tables a budget. The budget is expected to closely mirror the main elements of the Conservative party's electoral platform. One of the platform's highlights -- and a top-five priority for the government -- is a one-percentage-point cut to the GST.
"We've been clear about our five priorities. There are some other measures we'll be able to proceed with," Mr. Flaherty said this week, although he has said little about what those measures might be other than the military receiving a funding injection.
The council, which represents company CEOs who collectively manage more than $3-trillion in assets, say the Conservatives must also live up to a pledge in their platform to cut the general business tax to 19% from 21% by 2010 and eliminate both the federal capital tax and business surtax. The previous minority Liberal government promised to implement such measures but failed to deliver, largely to appease the NDP and win that party's support in the House of Commons.
"Canada's credibility in both domestic and international capital markets requires enactment of these measures as quickly as possible," the letter says.
"Corporate tax policy has the most direct impact on investment decisions ... and yet Canada persists in levying one of the highest marginal effective tax rates on investment in the world."
The council's warning yesterday about spending came as the government presented estimates for the 2006-07 fiscal year that project spending will rise to almost $200-billion -- numbers that suggest the Tories will be hard-pressed to make good on their election promise to limit growth in spending.
The estimates, which were prepared by the previous Liberal government, put expenditures at $199.7-billion, indicating an increase of 6.5% above what the former government initially projected, with program spending rising an even greater 8.6%.
The Conservatives promised to limit spending hikes by departments and agencies, other than Defence and Indian Affairs, to increases in population and inflation, or to what should be less than 3%.
"These numbers are showing the government is having a very difficult time to meet its campaign promise to hold the line on spending," said John Williamson, federal director of the Canadian Taxpayers Federation.
"And if they can't do that, the rest of their economic platform falls apart ... because their plan hinges on holding the line on spending in a key number of areas."
In fact, the Conservatives were counting on freeing up $22.5-billion to pay for their election promises by moderating increases in spending over the coming five years.
Treasury Board President John Baird said the new government had no hand in preparing the current estimates and that it would review spending increases to ensure they are in areas of government priority, such as health care, the provinces and the military.
The CEOs acknowledged in their letter that the former Liberal government did deliver tax relief for the business community during its nearly 13-year reign. Nevertheless, they said corporate income tax now accounts for 15 cents of every dollar Ottawa collects in tax -- up from 6 cents in 1993. They added Ireland has a lower corporate tax rate (12.5%) than Canada, yet collects 25% more in revenue from its business community.
The council cited work by the C.D. Howe Institute that suggested the corporate tax measures, if implemented, would inject $56-billion in capital investment, boost economic growth by $5-billion and generate 340,000 jobs.
The council's executive committee -- which counts Rick George of Suncor Energy and Gordon Nixon of Royal Bank of Canada as members -- met with Prime Minister Stephen Harper in February to express its views.
Mr. Harper nominated former committee member Gwyn Morgan last week to head up a proposed commission on public appointments.
pvieira@nationalpost.com
